Louis Basenese is one of the smartest investment analysts I know, and a good friend of mine to boot. And most of the time I agree with his research - and his conclusions.

Just not this time.

You see, this past Tuesday, his Investment U article caught my attention. In case you missed it, it was written about green energy. In it, Louis makes an argument for a "green energy super-bubble" that could burst in as little as two or three years, leaving unwary alternative energy investors in the lurch.

In his article, he cites four conditions that exist that make alternative energy ripe for a bubble. Those conditions may indeed be forming, but in and of themselves won't cause a "speculative bubble." In this case, there's definitely more to the story.

The Defense of Alternative Energy & Green Investing

Louis: "The legislation is in place, and more is on the way."

You'll get no argument from me that Bush's foray into increased ethanol production was misguided at best. But unlike ethanol, solar, wind and geothermal tax credits have been the catalysts that have energized those respective industries.

Improvements in technology have resulted in generation costs on par with - and in some cases, below - conventional fossil fuel sources. And with regard to solar in particular, costs per watt are on track to drop another 50% in the next few years. And in spite of the lower costs, industry margins will be in the 35% to 50% range, three times what they are today. That's a recipe for increased earnings if I ever saw one.

Louis: "Money is already pouring into the sector."

The $200 billion that Louis said flowed into the sector in the last two years is about right for a capital-intensive business like alternative energy. If it weren't flowing into alternative energy development and deployment, where else in the energy sector would it go?

To pay for higher oil, for one, but perhaps it's easier to describe where it won't be going:

No one wants a fossil fuel plant in their backyard (few are even planned, let alone being built), and you can forget about any new nuclear power plants here in the United States.

Only a few are even in the permit stage (a 10-year process in and of itself), construction can take 10 to 15 years, and cost $15 to $20 billion. In June 2008, Moody's estimated that the cost of power produced by a nuclear plant might possibly exceed $7 per watt, 10 times that of solar's $0.70 per watt. And then there's the spent fuel issue, decommissioning, etc.

Plenty of Room to Up Spending on Alternative Energy

Given that the United States alone spends over $500 billion every year on foreign oil, there's plenty of room to up the spending on alternative energies like wind power.

Besides, we don't really have a choice; cheap energy's the key ingredient for economic growth. The problem with coal, oil and natural gas is that they are all finite resources, and we've already used all the best deposits (those with the highest energy content). Combine that with oil prices that will likely be closer to $100 a barrel by the end of the year, reigniting interest in alternatives.

Louis: "Tough credit conditions actually encourage more speculation."

I'd argue that it's really investment we're talking about, not speculation. Because of the tax credits mentioned earlier, many start-ups already exist - particularly in the solar sector - where no less than 143 companies are currently playing in the thin-film segment of the industry.

There's no question that they won't all survive. But those that do will have viable, long-term business supplying the world with much-needed alternatives to fossil fuels.

Louis: "Green is the new black."

Here I whole-heartedly agree, but for a different reason...

A Paradigm Shift Is Underway In Alternative Energy

There's a paradigm shift underway in the alternative energy sector. Fossil fuels are on their way out and green is on the way in. It's going to be a 20- to -30-year process, and that's why it's destined to be such a great opportunity for investors.

It's not just a "U.S. social responsibility" thing, either. In fact, it's just the opposite. Our alternative energy roadmap is far behind those of many other nations. Take Portugal, for instance, where over 60% of their energy comes from renewable sources. Their goal? 100%. China and Germany also have aggressive alternative energy generation plans underway.

And because of all the government tax incentives dangled in front of the myriad companies, cost-effective solar panels and wind generators are already in use, generating power that produces no greenhouse gas, and more importantly, don't use a drop of oil when running.

Here's the bottom-line: The global need for cheap energy is so monumental, alternative energy is destined to remain a target-rich environment for many years to come. Will some companies be better investments than others? Of course... just like they are in any other sector.

But a bursting bubble in two to three years? I don't believe it. Actually, a mini one burst last year when oil dropped from $147 a barrel to where it is today, driving many solar, wind and geothermal stocks down as much as 80%. The valuations that these companies are sporting now are, in many cases, as low as they've ever been.

And that has helped to set up what could be one of the best sectors to invest in moving forward... for decades to come.

One thing you can be sure of: Both Louis and I will be watching it all unfold with an eye (or two, in this case) towards providing you with some great ideas for investing... and maybe for a few bragging rights.

Good investing,

David Fessler

Today's Investment U Crib Sheet

Regardless of which side of the argument you favor, there was one line in Louis' article that we can all agree on.

"Just be smart and buy proven (not probable) green energy companies. You don't want to own companies that are stuck in the lab with loads of potential. Instead, pick the ones with bona fide products and loads of sales. And religiously use trailing stops. It's the only way to make sure you don't bail too early... or worse, too late."

Louis' comments remind us that while it's important to get excited about the new technologies and the potential that they offer, we must balance this hope with pragmatism. Not all new technologies are profitable, and not all new uses of technology make for good investments.

Part of our core values is to follow the money, specifically earnings. Speculators may look at potential, while investors look at performance.

Even though we've warned readers about the "green" sector, we certainly didn't recommend that you should avoid the sector altogether, because that would be shortsighted.

Stay tuned for more on the emerging opportunities in the energy sector.

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